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Assume all rates are annualized with semi-annual compounding

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Assume all rates are annualized with semi-annual compounding. Please be explicit about how you derive your results and round to four decimals after the comma. $100 par of a 0.5-year 12%-coupon bond has a price of $104.

$100 par of a 1-year 14%-coupon bond has a price of $108.

a. What is the price of $1 par of a 0.5-year zero?

b. What is the price of $1 par of a 1-year zero?

c. Suppose $100 of a 1-year 10%-coupon bond has a price of $99. Is there an arbitrage opportunity? If so, how?

d. What is the 0.5-year zero rate?

e. What is the 1-year zero rate?

f. What is the 1-year par rate, i.e., what coupon rate would make the price of a 1-year coupon bond equal to par?

g. Considering the shape of the yield curve, should the yield on the 1-year 14%-coupon bond be higher or lower than the 1-year par rate?

Reference no: EM131495499

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